Preventing the Next Eurozone Crisis Starts Now

PARIS – European leaders have devoted scant attention to the future of the eurozone since July 2012, when Mario Draghi, the European Central Bank’s president, famously committed to do “whatever it takes” to save the common currency. For more than four years, they have essentially subcontracted the eurozone’s stability and integrity to the central bankers. But, while the ECB has performed the job skillfully, this quiet, convenient arrangement is coming to an end, because no central bank can solve political or constitutional conundrums. Europe’s heads of state and government would be wise to start over and consider options for the eurozone’s future, rather than letting circumstances decide for them.

So far, Europe’s leaders have had little appetite for such a discussion. In June 2015, they only paid lip service to a report on the euro’s future by the presidents of the various European institutions. A few weeks later, the issue briefly returned to the agenda when eurozone leaders spent a long late-July night arguing about whether to kick out Greece; but their stated intention to follow up and address underlying problems was short-lived. Finally, plans to respond to the Brexit shock by strengthening the eurozone were quickly ditched, owing to fear that reform would prove too divisive.

The issue, however, has not gone away. Although the monetary anesthetics administered by the ECB have reduced market tensions, nervousness has reemerged in the run-up to the Italian constitutional referendum on December 4. By end-November spreads between Italian and German ten-year bunds reached 200 basis points, a level not seen since 2014.

The worrying state of several Italian banks is one reason for the mounting concern. Brexit, and the election of a US president who advocates Americanism instead of globalism and dismisses the EU, adds the risk that voters, rather than markets, will call into question European monetary integration. Anti-euro political parties are on the rise in all major eurozone countries except Spain. In Italy, they may well command a majority.

On the economic front, the eurozone has much unfinished business. The banking union, launched in June 2012 to sever the interdependence of banks and states, has made good progress but is not yet complete. Competitiveness gaps between eurozone members have diminished, and external imbalances within it have abated, but largely thanks to the compression of domestic demand in Southern Europe; saving flows from North to South have not resumed. Unemployment gaps remain wide.

The eurozone still lacks a common fiscal mechanism as well, and Germany has flatly rejected the European Commission’s recent attempt to promote a “positive stance” in countries with room to boost spending. Of course, when the next recession hits, fiscal stability is likely to be in dangerously short supply.

Finally, the governance of the eurozone remains excessively cumbersome and technocratic. Most ministers, not to mention legislators, appear to have become lost in a procedural morass.

This unsatisfactory equilibrium may or may not last, depending on political or financial risks – or, most likely, the interaction between them. So the question now is how to hold a fruitful discussion to map out possible responses. The obstacles are twofold: First, there is no longer any momentum toward “more Europe”; on the contrary, a combination of skepticism about Europe and reluctance concerning potential transfers constitutes a major stumbling block. And, second, views about the nature and root causes of the euro crisis differ across countries. Given the dearth of political capital to spend on European responses, and disagreement on what the problem is and how to solve it, governments’ excess of caution is hardly surprising.

Both obstacles can be overcome. For starters, discussion of the eurozone’s future should not be framed as necessarily leading to further integration. The goal should be to make the eurozone work, which may imply giving more powers to the center in some fields, but also less in others. Fiscal responsibility, for example, should not be reduced to centralized enforcement of a common regime. It is possible to design a policy framework that embodies a more decentralized approach, empowering national institutions to monitor budgetary behavior and overall fiscal sustainability.

In fact, some steps in this direction have already been taken. Going further would imply making governments individually responsible for their misconduct – in other words, making partial debt restructuring possible within the eurozone. Such an approach would raise significant difficulties, if only because transiting to such a regime would be a hazardous journey; but options of this sort should be part of the discussion.

To overcome the second obstacle, the discussion should not start by addressing the legacy problems. Distributing a burden between creditors and debtors is inevitably acrimonious, because it is a purely zero-sum game. The history of international financial relations demonstrates that such discussions are inevitably delayed and necessarily adversarial when they take place. So the issue should not be addressed first. The seemingly realistic option of starting with immediate problems before addressing longer-term issues is only superficially attractive. In reality, discussions should start with the features of the permanent regime to be established in the longer run. Participants should explore logically coherent options until they determine if they can agree on a blueprint. It is only when agreement on a blueprint for the future has been reached that the path toward realizing it should be discussed.

There are no quick fixes to the eurozone’s problems. But one thing is clear: the lack of genuine discussion on possible futures is a serious cause for concern. Silence is not always golden; for the sake of Europe’s future, the hush surrounding the common currency should be broken as soon as possible.

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Comments

You cannot write that "the eurozone still lacks a common fiscal mechanism" when such a mechanism is explicitely forbidden by law (TFEU art. 123, German constitution) and absolutely rejected by the majority of the German people. You also cannot write that "banking union is not complete" when common deposit insurance is forbidden by law (TFEU art. 123, German constitution) and absolutely rejected by the majority of the German people. You cannot bemoan that "saving flows from North to South have not resumed" when the billions from the past were obviously not used for competetive improvements (education, research and development etc.) that would enable to repay debt but for dolce vita (wages above productivity levels, real estate bubbles etc.).

There seems to be a widespread assumption that the law or the constitution or the will of the German people could be simply wiped away. There seems to be a widespread assumption that Germany will pay in the end (l'Allemagne paiéra) and that Germany has to pay - even if the majority of Germans is against it. There seems to be the assumption that the German people should not have the right to decide on their budget, on their economical, financial or monetary politics on their own but that foreign institutions should have the right to decide on German politics and the right to transfer wealth out of Germany without approval by the German parliament.

Very obviously, the whole projects relies on a condition that is not given, namely the readiness of the North to permanently subsidize the South. The assumption that saving flows from North to South are naturally given is simply wrong. If an open discussion was allowed, this would become clear very quickly. Unfortunatedly (or rather: Therefore), an open discussion is not allowed. But when the open discussion still was allowed, i.e. before 2000, the will of the German people to exclude a transfer union was clear and the Maastricht treaty gives testimony of it. This will is unchanged, it is well justified and legitimate.

Future generations of historians will have to find out why the project was started when fundamental conditions were not given and who betrayed whom. In the end, all people were betrayed - not only the Germans, also the Greeks and the Italians. It was a betrayal of the European idea in total. And not only the financial costs are astronomic, also the credibility of state institutions and, in the end, the credibility of the constitution were severely damaged - if not destroyed - and when institutions are not trusted anymore then it is a systemic crisis.

Any future "blueprint" must therefore have the sovereignty of the people as starting point, there can be no compromise on that. As a consequence, to enforce the sovereignty of the people, the rule of law has to be strictly abided. There can be no institution operating outside the rule of law. If the enforcement of the rule of law (which guarantees the enforcement of the sovereignty of the people) triggers a financial crisis - then this is an indication that the whole system is fundamentally flawed because if the rule of law can no longer be enforced then the sovereignty of the people can no longer be enforced. Expression of the sovereignty of the people will again have to be the democratically legitimated parliaments with full power of decision making thus guaranteing the national right of self determination. Expression of the sovereignty of the people will also have to be again the national control over national borders (otherwise we simply have no control over our borders). Read more

Peter you have joined a financial swingers club and must expect the odd rash outcome. I dont understand at all why you joined a financial swingers club; its all Greek to me - but what exactly did you think you were joining when you totally and utterly gave up control of your currency to other club members who had a totally different view of money and its use Read more

@PeterWithout a Transfer Union - Investment Equalization - the North cannot permanently subsidize the South.Unlimited Migration then is the only guaranteed outcome - perhaps best facilitated by One Language.Peace n Prosperity in Europe 1945-2015 has been predicated on NATO - not European Union.NATO does not require dissolution of Sovereignty.Perhaps the template then is the European Economic Community - that best complemented NATO.EEC - Collective Economics without dissolution of Sovereignty. Read more

EU meetings are like ostrich reunions, so we all know what’s going to happen.

Now on your claim that that “Distributing a burden between creditors and debtors is inevitably acrimonious, because it is a purely zero-sum game”, you and the ones who think like you couldn’t be more wrong.

It’s not a zero sum game when much of the value created from the financial system comes from externalities, so it’s a win-win/lose-lose situation so it couldn’t be further away from a win-lose, zero sum game situation.

It’s a very hard concept to grasp for small-minded, black or white, ostrich people. We have fiat money for centuries and still most of the people and many economists don’t even understand how it works.

"Participants should explore logically coherent options until they determine if they can agree on a blueprint. It is only when agreement on a blueprint for the future has been reached that the path toward realizing it should be discussed" Read more

Eurozone is an unworkable, utopian dream, or nightmare, and the only possible outcome of the rising tensions within is breakup. European politicians have two choices. Either they continue to kick the can down the road and let the market tear eurozone apart in catastrophic collapse or they start behaving responsible and prepare a velvet divorce.

Of course, no one should hold his breath, with careerist, incompetent and clueless "politicians" like Merkel, Juncker, Renzi etc the only realistic outcome is a total collapse. European history repeating itself again. Wash, rinse, repeat ... Read more

If the members of the EU do not share common objectives there is no union other than in name. The three key measures of any relationship are - trust, mutual benefit and shared objectives. These are questionable at present. it is obvious that some accession states have simply increased the disorder economically or politically that was already present in the EU. Additionally the death machine that the euro is will lever other resident effects and has started that already Read more

This is not about Germany leading anything, it is about leadership failure in other EZ countries. Not that Germany can claim much leadership

German reserves have been levered by the structural imbalances central to the EZ but German alarm at the zombi zone army approaching the counting house is understandable. German assets divided up between all the zombis will evaporate in the midday Sun Read more

These last 70 years, Germany has assumed the roles that the other Western powers gave it: develop economically, challenge the Russians, don't build Nukes, integrate with the rest of Europe, plan to stay integrated forever, absorb Eastern Germany, then the whole of Eastern Europe, etc.It seems that all this won't prevent Germany from presiding on yet another European debacle ... but now of a different style. Read more

I agree with John Below. German internal deflation policy has devastated southern Europe, causing mass migration, and possibly Brexit as a result. By deflating demand it does not really benefit Germany in economic terms. All that is left to explain this behaviour is a mix of greed and Sado-Supremacism, to dominate Europe and take pleasure in others imposed misfortune. The situation cannot be remedied without removing Germany from a position of complete political dominance in the EU and that requires Southern Europe to develop coordination and backbone, and try to peel France away from Germany - and for that matter a complete clean out of the EU presidents. Its also interesting to note that the real reason for being harsh on a UK, which is suffering from an immense population crisis, is that freedom of movement is the only safety valve left for the adverse consequences of German policy on southern Europe - the whole thing is about greed. Read more

Do something about Germany's obsessive need to wrack up payments surpluses. This is the driver that is killing the Eurozone. No one is taking them to task for excessive payments imbalances and Germans are rather proud of it. For the rest of the Eurozone it is the elephant in the room. If this can't be re-balanced then Germany should leave the Eurozone. Actually the Eurozone is not doing Germany much good. In the short term If it all goes bump they'll be left with a pile of Target 2's not worth the Bytes they are stored on. In the longer term it is corroding their competitiveness. They do not need to work at competing as the Euro Exchange rate does it all for them. Read more

The crisis has been continuing for years, just temporarily at a slightly lower temperature. At best, the boiling over could be prevented, but even that is unlikely. The unfortunate and inconvenient truth is, that the political elites of Europe have not noticeably tried to organize the EU and the Euro better, in a much more functional and stable architecture. The Euro is only kept alive with the QE from the EZB, and all of it. The EU is constitutionally and institutionally so hopelessly dysfunctional, that with the present structures and procedures it can only go one way - decline. As a response to this dysfunctionalty we have Brexit and national assertivness in many countries. There is little love left. Without decisive leadership, from whomever, there is no hope that of reversal of this erosion. Read more

It is too little, too late.....Too many generations have been left in the wilderness for far too long, they have come back not to bite.... but to devore.. Politicians and Advisers (so -called Experts) brace yourselves for more of the unpleasant and of the "unexpected".. Read more

A word of advice to the Central Bankers, either you get on with doing a constructive work that you are being paid to do or just resign. You are not politicians neither are you expected to perform the role of a politician. Read more

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